Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified entirely by, our condensed consolidated financial statements (including Notes to the Condensed Consolidated Financial Statements) and the other consolidated financial information under Item 1 of this Quarterly Report on Form 10-Q. Some of the information in this discussion and analysis includes forward-looking statements that involve risk and uncertainties. Actual results and timing of events could differ from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. Based on the duration and severity of the impacts of the COVID-19 pandemic, including but not limited to any negative economic conditions arising from the pandemic, our ability to assess potential patients in hospitals and set up and treat patients in the home, and the impacts of government actions and administrative regulations on the healthcare industry and broader economy, including through existing and any future stimulus efforts, we are uncertain of the ultimate impact COVID-19 could have on our business, financial condition and results of operations. The impact of COVID-19 on our financial results are discussed in more detail below.
Certain statements and information in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 or "forward-looking information" as such term is defined in applicable Canadian securities legislation (collectively, "forward-looking statements"). Any statements other than statements of historical information, including those that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking and may involve estimates, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. These forward-looking statements are made as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except as required by applicable law.
Forward-looking statements relate to future events or future performance and reflect the expectations or beliefs of management regarding future events, and include, but are not limited to, statements with respect to: operating results; profitability; financial condition and resources; anticipated needs for working capital; liquidity; capital resources; capital expenditures; milestones; licensing milestones; information with respect to future growth and growth strategies; anticipated trends in our industry; our future financing plans; timelines; currency fluctuations; government regulation; unanticipated expenses; commercial disputes or claims; limitations on insurance coverage; and availability of cash flow to fund capital requirements.
Often, but not always, forward-looking information can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “potential”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates”, “believes”, “projects”, or the negatives thereof or variations of such words and phrases or statements that certain actions, events or results “will”, “should”, “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved” or the negative of these terms or comparable terminology.
Forward-looking statements are based on the reasonable assumptions, estimates, analysis and opinions of management made in light of its experience and its perception of trends, current conditions and expected developments, as well as other factors that management believes to be relevant and reasonable in the circumstances at the date that such statements are made, but which may prove to be incorrect. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable. We cannot assure you, however, that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
March 31,June 30, 2020 and 2019 | | |
By their nature, forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, including those identified under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and the other documents we file with the SEC, including under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, and with the securities regulatory authorities in certain provinces of Canada, which contribute to the possibility that the predicted outcomes may not occur or may be delayed. The risks, uncertainties and other factors, many of which are beyond our control, that could influence actual results include, but are not limited to: the general business, market and economic conditions in the regions in which the we operate; the impact of the COVID-19 pandemic and of the actions taken by governmental authorities, individuals and companies in response to the pandemic on our business, financial condition and results of operations, including on the our patient base and revenues, employees, and equipment and supplies; we may be subject to significant capital requirements and operating risks; our ability to implement business strategies and pursue business opportunities; volatility in the market price of our common shares; our novel business model; the risk that the clinical application of treatments that demonstrate positive results in a study may not be positively replicated or that such test results may not be predictive of actual treatment results or may not result in the adoption of such treatments by providers; the state of the capital markets; the availability of funds and resources to pursue operations; decline of reimbursement rates; dependence on few payors; possible new drug discoveries; dependence on key suppliers; granting of permits and licenses in a highly regulated business; competition; low profit market segments; disruptions in or attacks (including cyber-attacks) on our information technology, internet, network access or other voice or data communications systems or services; the evolution of various types of fraud or other criminal behavior to which we are exposed; the failure of third parties to comply with their obligations; difficulty integrating newly acquired businesses; the impact of new and changes to, or application of, current laws and regulations; the overall difficult litigation and regulatory environment; increased competition; changes in foreign currency rates; increased funding costs and market volatility due to market illiquidity and competition for funding; critical accounting estimates and changes to accounting standards, policies, and methods used by us; the impact of the previously disclosed restatement and correction of our previously issued financial statements; the previously disclosed identified material weakness in our internal control over financial reporting and our ability to remediate that material weakness; the initiation of legal or regulatory proceedings with respect to the restatement and corrections; the adverse effects on our business, results of operations, financial condition and stock price, as a result of the restatement and correction process; our status as an emerging growth company and a foreign private issuer; and the occurrence of natural and unnatural catastrophic events or health epidemics or concerns, such as the recent COVID-19 pandemic, and claims resulting from such events or concerns, as well as other general economic, market and business conditions; and other factors beyond our control.
General Matters
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms the "Company," "we," "us" and "our" refer to Viemed Healthcare, Inc. and its wholly-owned subsidiaries, Viemed Inc., Home Sleep Delivered, L.L.C. ("HSD"), and Sleep Management, L.L.C. dba Viemed ("Viemed").subsidiaries.
We were incorporated on December 14, 2016 pursuant to the Business Corporations Act (British Columbia), and. As of June 30, 2020, we determined that we no longer qualify as a "foreign private issuer," as defined in Rule 12b-23b-4 of the Exchange Act, for the purposes of the informational requirements of the Exchange Act. Although, asAs a foreign private issuer,result, effective January 1, 2021, we would not be requiredwill become subject to do so, wethe proxy solicitation rules under Section 14 of the Exchange Act and Regulation FD, and our officers, directors, and principal shareholders will become subject to the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. We will continue to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the SEC, instead of filing the reporting forms available to foreign private issuers.SEC.
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"), and as such, we have elected to comply with certain reduced U.S. public company reporting requirements.
Unless otherwise noted herein, all references to "$" or "USD" are to the currency of the United States and references to "CAD$" or "Canadian dollars" are to the currency of Canada.
Overview
We provide an array of home medical equipment, services and supplies, specializing in post-acute respiratory care services in the United States. Our primary objective is to focus on the organic growth of the business and thereby solidify our position as one of the United States’ largest providers of in home therapy for patients suffering from respiratory diseases. Our respiratory care programs are designed specifically for payors to have the ability to treat patients in the home for less total cost and with a superior quality of care. Our services include respiratory disease management (through the rental of various durable medical equipment ("DME") devices), in-home sleep testing and sleep apnea treatment, oxygen therapy, and the sale of associated supplies.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
We derive the majority of our revenue through the rental of non-invasive and invasive ventilators which represented 78.9%86.1% of our traditional revenue, excluding the COVID-19 response sales, and 89.5%86.4% of our revenue for the three months ended March 31,June 30, 2020 and 2019, respectively, and 84.3% and 87.9% for the six months ended June 30, 2020 and 2019, respectively. We combine the benefits of home ventilation support with licensed Respiratory Therapists ("RTs") to drive improved patient outcomes and reduce costly hospital readmissions.
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressed in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
We expect to use an organic growth model whereby expansion is accomplished through existing service areas as well as in new regions through a cost efficient launch that reduces location expenses. Our licensed RTs currently serve patients in over 3035 states. We expect to continue to employ more RTs in order to assure our high service model is accomplished in the home. As of March 31,June 30, 2020, we employed more than 255249 licensed RTs, representing more than 54%52% of our company-wide employee count. By focusing overhead costs on personnel that service the patient rather than physical location costs, we anticipate efficiently scaling our business in regions that are currently not being effectively serviced.
The continued trend of servicing patients in the home rather than in hospitals is aligned with our business objective and we anticipate that this trend will continue to offer growth opportunities for us. We expect to continue to be a solution to the rising health costs in the United States by offering more cost effective, home based solutions while increasing the quality of life for patients fighting serious respiratory diseases.
Trends Affecting our Business
On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. Various policies and initiatives have been implemented to reduce the transmission of COVID-19, including travel bans and restrictions, the postponement of non-essential medical surgeries, the limiting of access to medical facilities in certain areas, the promotion of social distancing and the adoption of remote working policies. Local, state and national governments continue to emphasize the importance of essential medical personnel and we remain open to meet the needs of our communities. Employee and patient safety is our first priority, and as a result, we put preparedness plans in place for our employees, especially our clinical personnel, and modified our clinical protocols to limit unnecessary patient encounters in order to ensure the safety of our employees as well as the safety of our patients. These measures do not appear to be negatively impacting our patient attrition rate at this time. In addition, our current ability to assess potential patients in hospitals varies by hospital and city, but overall our business of setting up new patients in the home is continuing. Ascontinuing although at lower levels than in recent periods.
In late May and early June, many state governments began a result,phased reopening of their economies while adhering to new guidelines and enhanced safety measures, including social distancing and face mask protocols. However, certain states have paused or reversed plans to reopen their economies as new cases of COVID-19 have been on the rise in recent weeks. To date there has been minimal disruption to our normal operations, though it is possible that more significant disruptions could occur if the COVID-19 pandemic continues for a prolonged period of time.
The COVID-19 pandemic has resulted in a significant economic downturn in the United States and globally and has also led to significant disruptions and volatility in capital and financial markets. Broad economic factors resulting from the current COVID-19 pandemic, including high unemployment and underemployment levels and reduced consumer spending and confidence, could also affect our service mix, revenue mix, payor mix and patient base, as well as our ability to collect outstanding receivables. Business closures and layoffs in the geographic areas in which we operate may lead to increases in the uninsured and underinsuredunder insured populations and adversely affect demand for our services, as well as the ability of patients and other payors to pay for services rendered. Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect our financial results and require an increased level of working capital. In addition, we may experience supply chain disruptions, including delays and price increases in equipment and supplies. Staffing, equipment and supplies shortages may also impact our ability to assess potential patients in hospitals and set up and treat patients in the home.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
We believe we presently have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times, such as limiting discretionary spending across the organization. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was signed into law on March 27, 2020, provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The legislation provides for $100 billion in relief funds to hospitals and other healthcare providers on the front lines of the coronavirus response to support healthcare-related expenses or lost revenue attributable to COVID-19 and to ensure uninsured Americans can get testing and treatment for COVID-19. As a result, we received a payment from the Provider Relief Fund forof $3.5 million in April 2020. Payments from the Provider Relief Fund are intended to compensate healthcare providers for lost revenues and incremental expenses incurred in response to the COVID-19 pandemic and are not required to be repaid provided the recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using Provider Relief Fund funds to reimburse expenses or losses that other sources are obligated to reimburse. In accordance with the terms of acceptance for the grant, we expect to utilizehave utilized these funds to prevent, prepare for, and respond to the COVID-19 pandemic.
The CARES Act also provides for a temporary suspension of the 2% payment sequestration adjustment currently applied to all Medicare fee-for-service claims. The suspension is effective for claims with dates of service from May 1, 2020 through December 31, 2020. However, CMS and Medicare Administrative Contractors may issue guidance that affects the implementation of this provision.
As part of the CARES Act legislation, certain Payroll Protection Program ("PPP") loans were authorized for small businesses to pay their employees, subject to potential debt forgiveness. Our company evaluated the PPP extensively and after evaluation, decided not to submit a PPP loan application.
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressed in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
We are continuing to monitor any effects or requirements that may result from the CARES Act as many of the provisions in the CARES Act are temporary and may require us to modify our operations and compliance procedures. CMS and other federal agencies have and are likely to issue rules and regulations to implement the CARES Act. The impact of these rules and regulations are unknown and may affect us. To the extent these provisions will expire as stated in the CARES Act, we will be required to unwind any changes.
While the overall impact of COVID-19 on our consolidated results of operations for the threesix months ended March 31,June 30, 2020 has resulted in an overall increase in revenues related to additional product sales during the period, the overall impact that COVID-19 will have on our consolidated results of operations throughout 2020 remains uncertain and difficult to predict and will depend on, among other factors, the duration and severity of the pandemic, as well as any negative economic conditions arising from the pandemic, our ability to assess potential patients in hospitals and set up and treat patients in the home and the impacts of government actions and administrative regulations on the healthcare industry and broader economy, including through existing and any future stimulus efforts. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, liquidity and capital resources. If COVID-19 continues to spread or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations. For additional information, see Part II. Item 1A “Risk Factors.”
In 2019, CMS announced the inclusion of noninvasive ventilator products on the list of products subject to the competitive bidding program for Round 2021, which covers the period of January 1, 2021 through December 31, 2023. Rental revenue from ventilator products represents a significant portion of our revenues (approximately 86% of total revenue in 2019). At the end of 2019, approximately 19% of ventilator product-related revenue was set to be subject to the competitive bidding process under Medicare. On March 9, 2020, CMS announced that due to the COVID-19 pandemic, the President's exercise of the Defense Production Act, public concern regarding access to ventilators, and the non-invasive ventilators product category being new to the competitive bidding program, non-invasive ventilators were removed as a product category from Round 2021 and this removal from the competitive bidding process is expected to last three years. As a result of this announcement, we retain the ability to continue to furnish non-invasive ventilators for all of our Medicare accredited areas, however, we are uncertain if vents will be included in future competitive bidding programs.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
The below table highlights summary financial and operational metrics for the last eight quarters.
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| (Tabular amounts expressed in thousands of U.S. Dollars, except vent patients) | | | | | | | | |
| For the quarter ended | June 30,
2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 |
| Financial Information: | | | | | | | | |
| Revenue | $ | 42,854 | | $ | 23,806 | | $ | 21,448 | | $ | 20,368 | | $ | 20,325 | | $ | 18,115 | | $ | 18,363 | | $ | 16,930 | |
| Gross Profit | 25,927 | | 15,553 | | 14,243 | | 14,050 | | 14,639 | | 13,074 | | 13,519 | | 12,829 | |
| Gross Profit % | 61 | % | 65 | % | 66 | % | 69 | % | 72 | % | 72 | % | 74 | % | 76 | % |
| Net Income | 19,412 | | 4,243 | | 2,388 | | 2,853 | | 1,326 | | 1,958 | | 2,968 | | 2,219 | |
| Cash (As of) | 29,707 | | 8,409 | | 13,355 | | 12,630 | | 7,691 | | 7,410 | | 10,413 | | 10,174 | |
| Total Assets (As of) | 112,178 | | 86,801 | | 82,596 | | 79,981 | | 71,014 | | 58,718 | | 53,653 | | 49,240 | |
Adjusted EBITDA(1) | 16,287 | | 7,869 | | 5,569 | | 4,883 | | 4,116 | | 4,466 | | 4,896 | | 4,155 | |
| Operational Information: | | | | | | | | |
| | | | | | | | |
Vent Patients(2) | 7,705 | | 7,965 | | 7,759 | | 7,421 | | 7,130 | | 6,393 | | 5,905 | | 5,444 | |
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| (Tabular amounts expressed in thousands of U.S. Dollars, except vent patients) |
| For the quarter ended | March 31,
2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | June 30, 2018 |
| Financial Information: | | | | | | | |
| Revenue | $ | 23,806 |
| $ | 21,448 |
| $ | 20,368 |
| $ | 20,325 |
| $ | 18,115 |
| $ | 18,363 |
| $ | 16,930 |
| $ | 15,208 |
|
| Gross Profit | 15,553 |
| 14,243 |
| 14,050 |
| 14,639 |
| 13,074 |
| 13,519 |
| 12,829 |
| 11,023 |
|
| Gross Profit % | 65 | % | 66 | % | 69 | % | 72 | % | 72 | % | 74 | % | 76 | % | 72 | % |
| Net Income | 4,243 |
| 2,388 |
| 2,853 |
| 1,326 |
| 1,958 |
| 2,968 |
| 2,219 |
| 2,098 |
|
| Cash (As of) | 8,409 |
| 13,355 |
| 12,630 |
| 7,691 |
| 7,410 |
| 10,413 |
| 10,174 |
| 8,551 |
|
| Total Assets (As of) | 86,801 |
| 82,596 |
| 79,981 |
| 71,014 |
| 58,718 |
| 53,653 |
| 49,240 |
| 44,256 |
|
Adjusted EBITDA(1) | 7,869 |
| 5,569 |
| 4,883 |
| 4,116 |
| 4,466 |
| 4,896 |
| 4,155 |
| 3,846 |
|
| Operational Information: | | | | | | | |
Vent Patients(2) | 7,965 |
| 7,759 |
| 7,421 |
| 7,130 |
| 6,393 |
| 5,905 |
| 5,444 |
| 5,078 |
|
(1) Refer to "Non-GAAP Financial Measures" section below for definition of Adjusted EBITDA.
(2) Vent Patients represents the number of active ventilator patients on recurring billing service at the end of each calendar quarter.
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressed in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
Results of Operations
Comparison of the Three Months Ended March 31,June 30, 2020 and 2019:
The following table summarizes our results of operations for the three months ended March 31,June 30, 2020 and 2019:
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| Three Months Ended June 30, | | | | | | | | | | |
| 2020 | | % of Total Revenue | | 2019 | | % of Total Revenue | | $
Change | | %
Change |
| Revenue | $ | 42,854 | | | 100.0 | % | | $ | 20,325 | | | 100.0 | % | | $ | 22,529 | | | 110.8 | % |
| Cost of revenue | 16,927 | | | 39.5 | % | | 5,686 | | | 28.0 | % | | 11,241 | | | 197.7 | % |
| Gross profit | 25,927 | | | 60.5 | % | | 14,639 | | | 72.0 | % | | 11,288 | | | 77.1 | % |
| Selling, general and administrative | 16,428 | | | 38.3 | % | | 11,516 | | | 56.7 | % | | 4,912 | | | 42.7 | % |
| Research and development | 271 | | | 0.6 | % | | 203 | | | 1.0 | % | | 68 | | | 33.5 | % |
| Stock-based compensation | 1,196 | | | 2.8 | % | | 1,034 | | | 5.1 | % | | 162 | | | 15.7 | % |
| Depreciation | 205 | | | 0.5 | % | | 138 | | | 0.7 | % | | 67 | | | 48.6 | % |
| (Gain) loss on disposal of property and equipment | (1,458) | | | (3.4) | % | | 85 | | | 0.4 | % | | (1,543) | | | NM |
| Other (income) expense | (3,574) | | | (8.3) | % | | (1) | | | — | % | | (3,573) | | | NM |
| Income from operations | 12,859 | | | 30.0 | % | | 1,664 | | | 8.2 | % | | 11,195 | | | 672.8 | % |
| Non-operating expenses | | | | | | | | | | | |
| Unrealized (gain) loss on warrant conversion liability | — | | | — | % | | 268 | | | 1.3 | % | | (268) | | | (100.0) | % |
| (Gain) loss from equity investment | (42) | | | (0.1) | % | | 26 | | | 0.1 | % | | (68) | | | NM |
| Interest expense, net | 135 | | | 0.3 | % | | 20 | | | 0.1 | % | | 115 | | | NM |
| Net income before taxes | 12,766 | | | 29.8 | % | | 1,350 | | | 6.6 | % | | 11,416 | | | 845.6 | % |
| (Benefit) provision for income taxes | (6,646) | | | (15.5) | % | | 24 | | | 0.1 | % | | (6,670) | | | NM |
| Net income | $ | 19,412 | | | 45.3 | % | | $ | 1,326 | | | 6.5 | % | | $ | 18,086 | | | NM |
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| | Three Months Ended March 31, |
| | 2020 | | % of Total Revenue | | 2019 | | % of Total Revenue | | $
Change | | %
Change |
| Revenue | $ | 23,806 |
| | 100.0 | % | | $ | 18,115 |
| | 100.0 | % | | $ | 5,691 |
| | 31.4 | % |
| Cost of revenue | 8,253 |
| | 34.7 | % | | 5,041 |
| | 27.8 | % | | 3,212 |
| | 63.7 | % |
| Gross profit | 15,553 |
| | 65.3 | % | | 13,074 |
| | 72.2 | % | | 2,479 |
| | 19.0 | % |
| Selling, general and administrative | 10,577 |
| | 44.4 | % | | 9,460 |
| | 52.2 | % | | 1,117 |
| | 11.8 | % |
| Research and development | 174 |
| | 0.7 | % | | 234 |
| | 1.3 | % | | (60 | ) | | (25.6 | )% |
| Stock-based compensation | 1,151 |
| | 4.8 | % | | 880 |
| | 4.9 | % | | 271 |
| | 30.8 | % |
| Depreciation | 205 |
| | 0.9 | % | | 129 |
| | 0.7 | % | | 76 |
| | 58.9 | % |
| Loss (gain) on disposal of property and equipment | (1,169 | ) | | (4.9 | )% | | 56 |
| | 0.3 | % | | (1,225 | ) | | (2,187.5 | )% |
| Income from operations | 4,615 |
| | 19.4 | % | | 2,315 |
| | 12.8 | % | | 2,300 |
| | 99.4 | % |
| Non-operating expenses | | | | | | | | | | | |
| Unrealized (gain) loss on warrant conversion liability | — |
| | — | % | | 169 |
| | 0.9 | % | | (169 | ) | | (100.0 | )% |
| Loss from equity investment | 27 |
| | 0.1 | % | | 24 |
| | 0.1 | % | | 3 |
| | 12.5 | % |
| Interest expense, net | 158 |
| | 0.7 | % | | 26 |
| | 0.1 | % | | 132 |
| | 507.7 | % |
| Net income before taxes | 4,430 |
| | 18.6 | % | | 2,096 |
| | 11.6 | % | | 2,334 |
| | 111.4 | % |
| Provision for income taxes | 187 |
| | 0.8 | % | | 138 |
| | 0.8 | % | | 49 |
| | 35.5 | % |
| Net income | $ | 4,243 |
| | 17.8 | % | | $ | 1,958 |
| | 10.8 | % | | $ | 2,285 |
| | 116.7 | % |
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
Revenue
The following table summarizes our revenue for the three months ended March 31,June 30, 2020 and 2019:
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| Three Months Ended June 30, | | | | | | | | | | |
| 2020 | | % of Total Revenue | | 2019 | | % of Total Revenue | | $
Change | | %
Change |
| Net revenue from rentals under Topic 842 | | | | | | | | | | | |
| Ventilator rentals, non-invasive and invasive | $ | 19,918 | | | 46.5 | % | | $ | 17,573 | | | 86.4 | % | | $ | 2,345 | | | 13.3 | % |
| Other durable medical equipment rentals | 2,404 | | | 5.6 | % | | 1,218 | | | 6.0 | % | | 1,186 | | | 97.4 | % |
| Net revenue from sales and services under Topic 606 | | | | | | | | | | | |
| Equipment and supply sales | 540 | | | 1.2 | % | | 1,075 | | | 5.3 | % | | (535) | | | (49.8) | % |
| COVID-19 response sales | 19,712 | | | 46.0 | % | | — | | | — | % | | 19,712 | | | 100.0 | % |
| Service revenues | 280 | | | 0.7 | % | | 459 | | | 2.3 | % | | (179) | | | (39.0) | % |
| Total net revenue | $ | 42,854 | | | 100.0 | % | | $ | 20,325 | | | 100.0 | % | | $ | 22,529 | | | 110.8 | % |
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| | Three Months Ended March 31, |
| | 2020 | | % of Total Revenue | | 2019 | | % of Total Revenue | | $
Change | | %
Change |
| Net revenue from rentals under Topic 842 | | | | | | | | | | | |
| Ventilator rentals, non-invasive and invasive | $ | 18,792 |
| | 78.9 | % | | $ | 16,204 |
| | 89.4 | % | | $ | 2,588 |
| | 16.0 | % |
| Other durable medical equipment rentals | 2,131 |
| | 9.0 | % | | 797 |
| | 4.4 | % | | 1,334 |
| | 167.4 | % |
| Net revenue from sales and services under Topic 606 | | | | | | | | | | | |
| Equipment and supply sales | 1,533 |
| | 6.4 | % | | 778 |
| | 4.3 | % | | 755 |
| | 97.0 | % |
| COVID-19 response sales | 1,040 |
| | 4.4 | % | | — |
| | — | % | | 1,040 |
| | 100.0 | % |
| Service revenues | 310 |
| | 1.3 | % | | 336 |
| | 1.9 | % | | (26 | ) | | (7.7 | )% |
| Total net revenue | $ | 23,806 |
| | 100.0 | % | | $ | 18,115 |
| | 100.0 | % | | $ | 5,691 |
| | 31.4 | % |
For the three months ended March 31,June 30, 2020, revenue totaled $23.8$42.9 million, an increase of $5.7$22.5 million (or 31.4%110.8%) from the comparable period in 2019. The revenue growth was primarily driven by a $2.6COVID-19 response sales of $19.7 million. In response to the COVID-19 pandemic, we have been working in close cooperation with state agencies and hospital systems to source urgently needed medical equipment such as ventilators, ventilator supplies, other respiratory equipment, and personal protective equipment. During the three months ended June 30, 2020, the $19.7 million of COVID-19 response sales consisted primarily of PAPs, ventilators and associated supplies and personal protective equipment. We expect further COVID-19 response sales during the remainder of 2020, but the quantity and impact of such sales remains uncertain and dependent on the length and intensity of the COVID-19 pandemic and the availability of such equipment and supplies from other suppliers.
Excluding the COVID-19 response sales, net revenue increased $2.8 million (or 16.0%13.9%) from the comparable period in 2019. The increase inwas primarily driven by increased ventilator rental revenue. Ourrevenue of $2.3 million (or 13.3%) coinciding with our active ventilator patient base grewgrowing from 6,3937,130 as of March 31,June 30, 2019 to 7,9657,705 as of March 31,June 30, 2020, an increase of 25%8%. Rental revenue from other DME grew $1.3$1.2 million (or 167.4%97.4%) quarter over quarter. This growth was largely attributable to our percussion vests, PAPs, and to a lesser extent our many other respiratory-related products (PAPs, oxygen concentrators, nebulizers).concentrators. As we continue to expand geographically into new states and further expand our presence in our existing territories, we expect continued growth in our active ventilator patient base and ventilator rental revenue, as well as in our other respiratory products.products, though in the short term we anticipate growth to occur at a slower rate than in recent periods as a result of the pandemic.
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressedNon-COVID-19 related equipment sales and services combined decreased by $0.7 million (or 46.5%) year over year as the majority of our sales force shifted its focus to assist state agencies and hospitals in their efforts to procure respiratory equipment and supplies in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
In response to the COVID-19 pandemic, we have been working in close cooperation with state agencies and hospital systems to source urgently needed medical equipment such as ventilators, ventilator supplies and other respiratory equipment. During the three months ended March 31, 2020, we had $1.0 million of COVID-19 response related sales consisting primarily of ventilators and associated supplies.pandemic. We expect further COVID-19 relatedthat such equipment sales duringand services will continue to be impacted for the remainder of 2020, but the quantity and impact of such sales remains uncertain and dependent on the length and intensityduration of the COVID-19 pandemic and the availability of such equipment and supplies from other suppliers. Additionally, non-COVID-19 related equipment sales grew $0.8 million (or 97.0%) year over year primarily as a result of higher supply orders for our PAP patients.pandemic.
Cost of revenue and gross profit
For the three months ended March 31,June 30, 2020, cost of revenue totaled $8.3$16.9 million, an increase of $3.2$11.2 million (or 63.7%197.7%) from the comparable period in 2019. COVID-19 response sales accounted for $9.2 million (or 54.3%) of these costs. For the three months ended March 31,June 30, 2020 and 2019, gross profit percentage decreased from approximately 72.2%72.0% to approximately 65.3%60.5%. The decreased margins were primarily the result of the above mentioned COVID-19 response sales which contributed a weighted average gross profit percentage of 45.9%53.4%. Excluding the COVID-19 response sales, gross profit percentage for the three months ended March 31,June 30, 2020 was 66.2%66.6%. The reduction in gross profit percentage is also due in part to direct labor cost for respiratory therapists. While our active ventilator patient base growth was impacted by the current pandemic in the short term, we have not experienced a corresponding change in the number of respiratory therapists employed. We believe it to be in the long term interest of our patients and the business to continue to employ these essential employees. We expect our gross profit percentage for our normal operations (non-COVID-19 related) to remain relatively consistent with the current quarter through the end of 2020.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
Selling, general & administrative expense
For the three months ended March 31,June 30, 2020, selling, general and administrative expenses totaled $10.6$16.4 million, an increase of $1.1$4.9 million (or 11.8%42.7%) from the comparable prior period. Selling, general, and administrative expenses as a percentage of revenue decreased to 44.4%38.3% for the three months ended March 31,June 30, 2020 compared to 52.2%56.7% for the three months ended March 31,June 30, 2019. Excluding the impact of the COVID-19 response sales, selling, general, and administrative expenses as a percentage of revenue was 46.4%71.0% for the three months ended March 31,June 30, 2020.
The increase in overall selling, general and administrative expense as compared to the prior year period can be attributedis attributable to additional employee related expenses to accommodate both the overall growth of the Company, and an increase in associatedas well as additional public company expenses resulting fromrelating to our NASDAQ listing in August 2019, NASDAQ listing, partially offset by a decrease in travel, meals, and entertainment due to COVID-19 related restrictions. Employee compensation expenses increased $3.9 million (or 44.7%) as our full time employee costs, driven bycount increased to 459 on June 30, 2020 from 357 on June 30, 2019, an increase of 28.6%. Additionally, $1.6 million of the employee compensation expense increase was the result of the impact of our phantom stock plan. Our phantom stock plan is measured at fair value as of the reporting period and is driven primarily by the number of eligible employees and our stock price. During the three months ended March 31,On June 30, 2020, our stock price decreased 19%closed at $13.01 (CAD$), versus an increase of 26% during the three months ended March 31,$8.93 (CAD$) on June 30, 2019, driving lowerhigher comparable expenses related to these awards in the current period. Professional fees also increased $0.5 million (or 93%) for the comparable period, driven by higher legal and consulting fees relating to the COVID-19 pandemic. As we continue to respond to the COVID-19 pandemic, grow into new markets and increase our employee count, we expect selling, general, and administrative expenses will trend accordingly. We expect that selling, general and administrative expenses, as a percentage of revenuein absolute terms, will remain relatively consistent with the current quarter through the end of 2020.
Loss (gain)(Gain) loss on disposal of property and equipment
For the three months ended March 31,June 30, 2020, we recorded a gain on disposal of property and equipment of $1.2$1.5 million, compared to a loss of $0.1 million during the comparable period in 2019. As a result of our efforts for the COVID-19 response as described above, certain of our previously placed in service property and equipment was sold. As a result, during the three months ended March 31,June 30, 2020, we recorded sales proceeds on used equipment of $2.5 million which resulted in a net gain on disposal for related equipment of $1.6$1.5 million. We expect disposals of equipment to generally remain consistent with historical trends, with the exception of additional gains that could be realized from any additional COVID-19 response related sales, but the impact of such sales remains uncertain and dependent on the length and intensity of the COVID-19 pandemic and the availability of such equipment and supplies from other suppliers.
Stock-based compensationOther (income) expense
For the three months ended March 31,June 30, 2020, other income totaled $3.6 million. We received a payment from the Provider Relief Fund of $3.5 million in April 2020. Payments from the Provider Relief Fund are intended to compensate healthcare providers for lost revenues and incremental expenses incurred in response to the COVID-19 pandemic as described in detail above.
Stock-based compensation
For the three months ended June 30, 2020, stock-based compensation totaled $1.2 million, an increase of $0.3$0.2 million (or 30.8%15.7%) from the comparable period in 2019. This increase is attributable to the expense of additional stock-based awards during 2020. We expect that as we continue to increase our employee count and utilize stock-based awards as an aspect of employee compensation, stock-based compensation expense will increase accordingly. Stock-based compensation as a percentage of revenue has historically remained under 5%.
Interest expense, net
For the three months ended March 31,June 30, 2020, net interest expense totaled $158,000,$0.1 million, an increase of $132,000$0.1 million from the comparable period in 2019. The increased interest expense results from from the Building Term Note that funded the purchase of the new corporate headquarters in May 2019 and the Term Note used for general corporate purposes that was entered in September 2019. See "Liquidity and Capital Resources" below for additional information on the Building Term Note and Term Note. We expect net interest expense to remain relatively consistent through the end of 2020.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
(Benefit) provision for income taxes
For the three months ended June 30, 2020, the provision for income taxes was a $6.6 million benefit, compared to a $24,000 expense during the 2019 period. The decrease in income tax expense was primarily due to a lower effective tax rate which was caused by the release of a valuation allowance and recognition of a deferred tax asset during the current period. As we continue to incur substantial capital expenditures to acquire medical equipment to accommodate our patient base growth, combined with the deferred tax assets, we expect most near-term cash tax payments for federal and state tax liabilities to remain relatively consistent.
Net income
For the three months ended June 30, 2020, net income was $19.4 million, an increase of $18.1 million from the comparable period in 2019. Net income as a percentage of revenue increased from 6.5% for the three months ended June 30, 2019 to 45.3% for the three months ended June 30, 2020, driven by increased sales revenue, gains on disposal of equipment in response to COVID-19, and receipt of the Provider Relief Funds.
Comparison of the Six Months Ended June 30, 2020 and 2019:
The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | | | | | |
| 2020 | | % of Total Revenue | | 2019 | | % of Total Revenue | | $
Change | | %
Change |
| Revenue | $ | 66,660 | | | 100.0 | % | | $ | 38,440 | | | 100.0 | % | | $ | 28,220 | | | 73.4 | % |
| Cost of revenue | 25,180 | | | 37.8 | % | | 10,727 | | | 27.9 | % | | 14,453 | | | 134.7 | % |
| Gross profit | 41,480 | | | 62.2 | % | | 27,713 | | | 72.1 | % | | 13,767 | | | 49.7 | % |
| Selling, general and administrative | 27,005 | | | 40.5 | % | | 20,976 | | | 54.6 | % | | 6,029 | | | 28.7 | % |
| Research and development | 445 | | | 0.7 | % | | 437 | | | 1.1 | % | | 8 | | | 1.8 | % |
| Stock-based compensation | 2,347 | | | 3.5 | % | | 1,914 | | | 5.0 | % | | 433 | | | 22.6 | % |
| Depreciation | 410 | | | 0.6 | % | | 267 | | | 0.7 | % | | 143 | | | 53.6 | % |
| (Gain) loss on disposal of property and equipment | (2,627) | | | (3.9) | % | | 141 | | | 0.4 | % | | (2,768) | | | NM |
| Other (income) expense | (3,574) | | | (5.4) | % | | (2) | | | — | % | | (3,572) | | | NM |
| Income from operations | 17,474 | | | 26.2 | % | | 3,980 | | | 10.4 | % | | 13,494 | | | 339.0 | % |
| Non-operating expenses | | | | | | | | | | | |
| Unrealized (gain) loss on warrant conversion liability | — | | | — | % | | 437 | | | 1.1 | % | | (437) | | | (100.0) | % |
| Loss from equity investment | (15) | | | — | % | | 51 | | | 0.1 | % | | (66) | | | (129.4) | % |
| Interest expense, net | 293 | | | 0.4 | % | | 46 | | | 0.1 | % | | 247 | | | NM |
| Net income before taxes | 17,196 | | | 25.8 | % | | 3,446 | | | 9.0 | % | | 13,750 | | | 399.0 | % |
| (Benefit) provision for income taxes | (6,459) | | | (9.7) | % | | 162 | | | 0.4 | % | | (6,621) | | | NM |
| Net income | $ | 23,655 | | | 35.5 | % | | $ | 3,284 | | | 8.5 | % | | $ | 20,371 | | | 620.3 | % |
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
Revenue
The following table summarizes our revenue for the six months ended June 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | | | | | |
| 2020 | | % of Total Revenue | | 2019 | | % of Total Revenue | | $
Change | | %
Change |
| Net revenue from rentals under Topic 842 | | | | | | | | | | | |
| Ventilator rentals, non-invasive and invasive | $ | 38,710 | | | 58.1 | % | | $ | 33,777 | | | 87.9 | % | | $ | 4,933 | | | 14.6 | % |
| Other durable medical equipment rentals | 4,535 | | | 6.8 | % | | 2,015 | | | 5.2 | % | | 2,520 | | | 125.1 | % |
| Net revenue from sales and services under Topic 606 | | | | | | | | | | | |
| Equipment and supply sales | 2,072 | | | 3.1 | % | | 1,853 | | | 4.8 | % | | 219 | | | 11.8 | % |
| COVID-19 response sales | 20,753 | | | 31.1 | % | | — | | | — | % | | 20,753 | | | 100.0 | % |
| Service revenues | 590 | | | 0.9 | % | | 795 | | | 2.1 | % | | (205) | | | (25.8) | % |
| Total net revenue | $ | 66,660 | | | 100.0 | % | | $ | 38,440 | | | 100.0 | % | | $ | 28,220 | | | 73.4 | % |
For the six months ended June 30, 2020, revenue totaled $66.7 million, an increase of $28.2 million (or 507.7%73.4%) from the comparable period in 2019. The revenue growth was primarily driven by COVID-19 response sales of $20.8 million as described in more detail above. We expect further COVID-19 response sales during the remainder of 2020, but the quantity and impact of such sales remains uncertain and dependent on the length and intensity of the COVID-19 pandemic and the availability of such equipment and supplies from other suppliers.
Excluding the COVID-19 response sales, net revenue increased $7.5 million (or 19.4%) from the comparable period in 2019. Ventilator rental revenue increased $4.9 million (or 14.6%) due to our organic growth in active ventilator patient base. In addition to the ventilator rental revenue growth, rental revenue from other durable medical equipment grew $2.5 million (or 125.1%) which primary consisted of increased rentals of percussion vests and oxygen concentrators. In the short term, we anticipate our growth to occur at a slower rate than in recent periods as a result of the pandemic.
Non-COVID-19 related equipment sales and services combined were materially consistent year over year as the majority of our sales force shifted its focus to assist state agencies and hospitals in their efforts to procure respiratory equipment and supplies in response to the COVID-19 pandemic. We expect such equipment sales and services will continue to be impacted for the duration of the pandemic.
Cost of revenue and gross profit
For the six months ended June 30, 2020, cost of revenue totaled $25.2 million, an increase of $14.5 million (or 134.7%) from the comparable period in 2019. For the six months ended June 30, 2020 and 2019, gross profit percentage decreased from approximately 72.1% to approximately 62.2%. The lower margins are primarily the result of the high volume of COVID-19 response sales. Historically the majority of our revenue has come from equipment rentals. For the six months ended June 30, 2020, COVID-19 response sales accounted for 31.1% of total revenue, thus driving margin lower. Excluding COVID-19 response sales, gross profit percentage for the six months ended June 30, 2020 was 66.4%. The reduction in gross profit percentage is also due in part to direct labor cost for respiratory therapists. While our active ventilator patient base growth was impacted by the pandemic in the short term, we have not experienced a corresponding change in the number of respiratory therapists employed. We believe it to be in the long term interest of our patients and the business to continue to employ these essential employees. We expect our gross profit percentage for our normal operations (non-COVID-19 related) to remain relatively consistent with the current quarter through the end of 2020.
Selling, general & administrative expense
For the six months ended June 30, 2020, selling, general and administrative expenses totaled $27.0 million, an increase of $6.0 million (or 28.7%) from the comparable period in 2019. Selling, general, and administrative expenses as a percentage of revenue decreased to 40.5% for the six months ended June 30, 2020, compared to 54.6% and for the six months ended June 30, 2019. Excluding the impact of the COVID-19 response sales, selling, general, and administrative expenses as a percentage of revenue was 58.8% for the six months ended June 30, 2020.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
The increase in overall selling, general and administrative expense as compared to the prior year period is attributable to additional employee related expenses to accommodate the overall growth of the Company as well as additional public company expenses relating to our NASDAQ listing in August 2019, partially offset by a decrease in travel, meals, and entertainment due to COVID-19 related restrictions. Employee compensation increased $3.3 million (or 21%) as our full time employee count increased to 459 at June 30, 2020, compared to 357 at June 30, 2019, an increase of 28.6%. Included in employee compensation expense is $3.6 million related to of our phantom stock plan compared to $4.6 million from the comparable period in 2019.
Additionally, professional fees increased $1.0 million (or 112%) from the comparable period in 2019, driven by higher legal and consulting fees relating to the COVID-19 pandemic. As we continue to respond to the COVID-19 pandemic, grow into new markets and increase our employee count, we expect selling, general, and administrative expenses will trend accordingly. We expect that selling, general and administrative expenses as a percentage of revenue will trend higher towards historical percentages toward the end of 2020.
(Gain) loss on disposal of property and equipment
For the six months ended June 30, 2020, we recorded a gain on disposal of property and equipment of $2.6 million, compared to a loss of $0.1 million during the comparable period in 2019. As a result of our efforts for the COVID-19 response as described above, certain of our previously placed in service property and equipment was sold. As a result, during the six months ended June 30, 2020, we recorded sales proceeds on used equipment of $5.0 million which resulted in a net gain on disposal for related equipment of $3.5 million. We expect disposals of equipment to generally remain consistent with historical trends, with the exception of additional gains that could be realized from any additional COVID-19 response sales, but the impact of such sales remains uncertain and dependent on the length and intensity of the COVID-19 pandemic and the availability of such equipment and supplies from other suppliers.
Other (income) expense
For the six months ended June 30, 2020, other income totaled $3.6 million, an increase of $3.6 million from the comparable prior period. We received a payment from the Provider Relief Fund of $3.5 million in April 2020. Payments from the Provider Relief Fund are intended to compensate healthcare providers for lost revenues and incremental expenses incurred in response to the COVID-19 pandemic as described in detail above.
Stock-based compensation
For the six months ended June 30, 2020, stock-based compensation totaled $2.3 million, an increase of $0.4 million (or 22.6%) from the comparable period in 2019. We expect that as we continue to increase our employee count and utilize stock-based awards as an aspect of employee compensation, stock-based compensation expense will increase accordingly. Stock-based compensation as a percentage of revenue has historically remained under 5%.
Interest expense, net
For the six months ended June 30, 2020, net interest expense totaled $0.3 million, an increase of $0.2 million from the comparable period in 2019. We expect net interest expense to increase as a result of the Building Term Note and Term Note described below. We expect net interest expense to remain materially consistent through the end of 2020.
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressed in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
Provision(Benefit) provision for income taxes
For the threesix months ended March 31,June 30, 2020, the provision for income taxes was $187,000,a $6.5 million benefit, compared to $138,000a $0.2 million expense during the 2019 period. The current period provision is related to statedecrease in income tax liabilities. We expectexpense was primarily due to continue to benefit froma lower effective tax rate which was caused by the federalrelease of a valuation allowance and recognition of a deferred tax environment inasset during the United States. Recent tax changes allow for accelerated deductions for capital expenditures and lower corporate tax rates.current period. As we continue to incur substantial capital expenditures to acquire medical equipment to accommodate our rapid patient base growth, combined with the deferred tax assets, we expect most near-term cash tax payments will continue to result fromfor federal and state tax liabilities.liabilities to remain relatively consistent.
Net income
For the threesix months ended March 31,June 30, 2020, net income was $4.2$23.7 million, an increase of $2.3$20.4 million (or 116.7%) from the comparable period in 2019. Net income as a percentage of revenue increased from 10.8%8.5% for the threesix months ended March 31,June 30, 2019 to 17.8%35.5% for the threesix months ended March 31,June 30, 2020, primarily driven by increased sales revenue, increased gains on disposal of equipment in response to COVID-19, and reduced selling, general and administrative expenses, as described above.receipt of the Provider Relief Funds.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
Non-GAAP Financial Measures
Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that one of the most important measures for our company is Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure. We believe Adjusted EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is not dependent on the impact of our capitalization structure and items that are not part of our day-to-day operations. Management uses Adjusted EBITDA (i) to compare our operating performance on a consistent basis, (ii) to calculate incentive compensation for our employees, (iii) for planning purposes including the preparation of our internal annual operating budget, and (iv) to evaluate the performance and effectiveness of our operational strategies. Accordingly, we believe that Adjusted EBITDA provides useful information in understanding and evaluating our operating performance in the same manner as management.
In calculating Adjusted EBITDA, certain items (mostly non-cash) are excluded from net income including interest, taxes and depreciation of property and equipment. Set forth below are descriptions of the financial items that have been excluded from net income to calculate Adjusted EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to net income.
| |
– | Depreciation may be useful for investors to consider because it generally represents the wear and tear on the property and equipment used in our operations. However, we do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating costs. |
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– | The amount of interest expense we incur or interest income we generate may be useful for investors to consider and may result in current cash inflows or outflows. However, we do not consider the amount of interest expense or interest income to be a representative component of the day-to-day operating performance of our business. |
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– | Unrealized loss on warrant conversion liability may be useful for investors to consider as it represents changes in the fair value of warrants and exchangeable shares of subsidiaries, driven predominantly by changes in our share price and exchange rates. These changes are non-cash, as is the settlement of the underlying derivative liability, which occurs upon the conversion of the derivative instrument into common shares of the Company. |
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– | Stock-based compensation may be useful for investors to consider because it is an estimate of the non-cash component of compensation received by the Company’s directors, officers, employees and consultants. However, stock-based compensation is being excluded from our operating expenses because the decisions which gave rise to these expenses were not made to increase revenue in a particular period, but were made for the Company’s long-term benefit over multiple periods. While strategic decisions, such as those to issue stock-based awards are made to further our long-term strategic objectives and do impact our earnings under GAAP, these items affect multiple periods and management is not able to change or affect these items within any period. |
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– | Income tax expense may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes and may reduce or increase the amount of funds otherwise available for use. However, we do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business. |
–Depreciation may be useful for investors to consider because it generally represents the wear and tear on the property and equipment used in our operations. However, we do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating costs.
–The amount of interest expense we incur or interest income we generate may be useful for investors to consider and may result in current cash inflows or outflows. However, we do not consider the amount of interest expense or interest income to be a representative component of the day-to-day operating performance of our business. |
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressed in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
–Unrealized loss on warrant conversion liability may be useful for investors to consider as it represents changes in the fair value of warrants and exchangeable shares of subsidiaries, driven predominantly by changes in our share price and exchange rates. These changes are non-cash, as is the settlement of the underlying derivative liability, which occurs upon the conversion of the derivative instrument into common shares of the Company.
–Stock-based compensation may be useful for investors to consider because it is an estimate of the non-cash component of compensation received by the Company’s directors, officers, employees and consultants. However, stock-based compensation is being excluded from our operating expenses because the decisions which gave rise to these expenses were not made to increase revenue in a particular period, but were made for the Company’s long-term benefit over multiple periods. While strategic decisions, such as those to issue stock-based awards are made to further our long-term strategic objectives and do impact our earnings under GAAP, these items affect multiple periods and management is not able to change or affect these items within any period.
–Income tax expense may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes and may reduce or increase the amount of funds otherwise available for use. However, we do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business.
The following table is a reconciliation of Net income, the most directly comparable GAAP measure, to Adjusted EBITDA, on a historical basis for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the quarter ended | June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 |
| Net Income | $ | 19,412 | | $ | 4,243 | | $ | 2,388 | | $ | 2,853 | | $ | 1,326 | | $ | 1,958 | | $ | 2,968 | | $ | 2,219 | |
| Add back: | | | | | | | | |
| Depreciation | 2,190 | | 2,130 | | 2,003 | | 1,659 | | 1,444 | | 1,295 | | 1,177 | | 972 | |
| Interest expense | 135 | | 158 | | 212 | | 56 | | 20 | | 26 | | 30 | | 37 | |
| Unrealized (gain) loss on warrant conversion liability | — | | — | | — | | (800) | | 268 | | 169 | | (210) | | 220 | |
| Stock-based compensation | 1,196 | | 1,151 | | 908 | | 1,064 | | 1,034 | | 880 | | 804 | | 672 | |
| Income tax (benefit) expense | (6,646) | | 187 | | 58 | | 51 | | 24 | | 138 | | 127 | | 35 | |
| Adjusted EBITDA | $ | 16,287 | | $ | 7,869 | | $ | 5,569 | | $ | 4,883 | | $ | 4,116 | | $ | 4,466 | | $ | 4,896 | | $ | 4,155 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| For the quarter ended | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | June 30, 2018 |
| Net Income | $ | 4,243 |
| $ | 2,388 |
| $ | 2,853 |
| $ | 1,326 |
| $ | 1,958 |
| $ | 2,968 |
| $ | 2,219 |
| $ | 2,098 |
|
| Add back: | | | | | | | | |
| Depreciation | 2,130 |
| 2,003 |
| 1,659 |
| 1,444 |
| 1,295 |
| 1,177 |
| 972 |
| 893 |
|
| Interest expense | 158 |
| 212 |
| 56 |
| 20 |
| 26 |
| 30 |
| 37 |
| 67 |
|
| Unrealized (gain) loss on warrant conversion liability | — |
| — |
| (800 | ) | 268 |
| 169 |
| (210 | ) | 220 |
| 123 |
|
| Stock-based compensation | 1,151 |
| 908 |
| 1,064 |
| 1,034 |
| 880 |
| 804 |
| 672 |
| 665 |
|
| Income tax expense | 187 |
| 58 |
| 51 |
| 24 |
| 138 |
| 127 |
| 35 |
| — |
|
| Adjusted EBITDA | $ | 7,869 |
| $ | 5,569 |
| $ | 4,883 |
| $ | 4,116 |
| $ | 4,466 |
| $ | 4,896 |
| $ | 4,155 |
| $ | 3,846 |
|
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
Use of Non-GAAP Financial Measures
Adjusted EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP and should not be considered as an alternative to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. Adjusted EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP. Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Liquidity and Capital Resources
Cash and cash equivalents at March 31,June 30, 2020 was $8.4$29.7 million, compared to $13.4 million at December 31, 2019. Based on our current plan of operations, including potential acquisitions, we believe this amount, when combined with expected cash flows from operations and amounts available under our line of credit will be sufficient to fund our growth strategy and to meet our anticipated operating expenses, capital expenditures, and debt service obligations for at least the next 12 months. The Company utilizes short term leases with a major supplier that could be extended over a longer term if there was a need for additional liquidity. Additionally, the Company maintains a $10.0 million line of credit with Hancock Whitney Bank which was fully undrawn as of March 31,June 30, 2020.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| | 2020 | | 2019 |
| Net Cash provided by (used in): | | | | |
| Operating activities | | $ | 21,988 | | | $ | 5,963 | |
| Investing activities | | (620) | | | (7,487) | |
| Financing activities | | (5,016) | | | (1,198) | |
| Net increase (decrease) in cash and cash equivalents | | $ | 16,352 | | | $ | (2,722) | |
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Net Cash provided by (used in): | | | | |
| Operating activities | | $ | 607 |
| | $ | 650 |
|
| Investing activities | | (1,711 | ) | | (92 | ) |
| Financing activities | | (3,842 | ) | | (3,561 | ) |
| Net decrease in cash and cash equivalents | | $ | (4,946 | ) | | $ | (3,003 | ) |
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressed in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
Net Cash Provided by Operating Activities
Net cash provided by operating activities during the threesix months ended March 31,June 30, 2020 was $0.6$22.0 million, resulting from net income of $4.2$23.7 million and non-cash net income adjustments of $5.0$1.8 million and an increase in net operating liabilities of $7.2 million, which was partially offset by an increase in net operating assets of $10.1$10.6 million. The non-cash net income adjustments primarily consisted of $2.8$5.6 million in change of allowance for doubtful accounts, $2.1$4.3 million of depreciation, $2.6 million of gains on disposal of property and $1.2equipment, change in deferred tax asset of $7.8 million and $2.3 million of stock-based compensation. The uses of cash related to changes in operating assets primarily consisted of an increase in accounts receivable of $6.8$5.1 million which was partially offset by a decreaseand an increase in inventory of $0.4$5.2 million. The changes in operating liabilities primarily consisted of a decreasean increase in accounts payable of $3.6$2.0 million and increasesan increase in accrued liabilities of $2.4$3.8 million. The increase in our operating assets was primarily driven by accounts receivable related to COVID-19 response sales occurring at the end ofduring the quarter. Additionally, prepaid expenses and other current assets increased as a resultIncluded in our operating cash flows for the period is the receipt of deposits related to ventilator supplies.$3.5 million in Provider Relief Funds.
Net cash provided by operating activities during the threesix months ended March 31,June 30, 2019 was $0.7$6.0 million, resulting from net income of $2.0$3.3 million, non-cash net income adjustments of $4.7 million, a decrease in net operating liabilities of $0.2$9.1 million, and an increase in net operating liabilities of $2.3 million, which was partially offset by an increase in net operating assets of $5.8$8.8 million. The non-cash net income adjustments primarily consisted of $2.1$3.9 million in change of bad debt expense, $1.4allowance for doubtful accounts, $2.7 million of depreciation and $0.9$1.9 million of stock-based compensation. The uses of cash related to changes in operating assets primarily consisted of an increase in accounts receivable of $5.0$7.8 million as a result of increased revenue growth and an increase in inventory of $0.7$0.8 million. The changes in operating liabilities primarily consisted of increases in accounts payable of $0.5$1.9 million and deferred revenue of $0.2$0.7 million, partially offset by a decrease in accrued liabilities of $0.9$0.2 million.
Net Cash Used in Investing Activities
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
Net cash used in investing activities during the threesix months ended March 31,June 30, 2020 was $1.7$0.6 million, consisting of $4.2$5.7 million of purchases of property and equipment, partially offset by $2.5$5.1 million of COVID-19 response sales proceeds from the disposal of property and equipment. Purchases of property and equipment were primarily related to medical equipment rented to our patients. Combining cash purchases of property and equipment of $4.2$5.7 million and equipment financed through finance leases of $3.0$2.9 million, our total capital expenditures for the threesix months ended March 31,June 30, 2020 were $7.2$8.6 million. This represents a $2.6an $8.5 million, or 56.3%(or 49.7%), increasedecrease year over year, driven by our company growth.year.
Net cash used in investing activities during the threesix months ended March 31,June 30, 2019 was $92,000,$7.5 million, consisting of $116,000$7.7 million of purchases of property and equipment, partially offset by $24,000$0.2 million of proceeds from the disposal of property and equipment. Purchases of property and equipment were primarily related to the purchase of our new corporate headquarters in addition to medical equipment rented to our patients. Combining cash purchases of property and equipment of $116,000$7.7 million and equipment financed through finance leases of $4.5$9.4 million, our total capital expenditures for the threesix months ended March 31,June 30, 2019 was $4.6$17.1 million.
Net Cash Used in Financing Activities
Net cash used in financing activities during the threesix months ended March 31,June 30, 2020 was $3.8$5.0 million, consisting of $0.4$0.8 million in proceeds fromprincipal payments on the new term note, partially offset by $3.4Term Note and $5.9 million in repayments of finance lease liabilities.liabilities, partially offset by $1.8 million proceeds from the exercise of stock options.
Net cash used in financing activities during the threesix months ended March 31,June 30, 2019 was $3.6$1.2 million, consisting of $2.0$4.8 million in proceeds to finance the purchase of our corporate headquarters, $4.6 million in repayments of finance lease liabilities and $1.5 million of shares repurchased and canceled under our normal course issuer bid.
Line of Credit Agreement
On February 20, 2018, we entered intoThe Company maintains a two year commercial business loan agreement with Hancock Whitney Bank.line of credit in the amount of $10.0 million that expires May 1, 2023 under the Commercial Business Loan Agreement. Any amounts advanced on this line will be secured by substantially all our assets and carriedsubject to an interest rate of one month ICE LIBOR plus 3.00%, with a 4.00% interest rate floor. Advances of the line of credit initially were subject to a borrowing base as determined in accordance with the loan agreement, which was based on the value of our accounts receivable balance.
On March 19, 2019, we entered into an amendment to the loan agreement increasing the available line of credit from $5.0 million to $10.0 million and extending the expiration date to March 19, 2021. In addition, the borrowing base restriction was removed from the loan agreement.
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressed in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
On September 19, 2019, in conjunction with the Term Note described below, the Company entered into a third amendment to the loan agreement, which, among other things, replaced the financial covenants in the loan agreement with the following:
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| | |
Financial Covenant | Required Ratio | Ratio |
Total Debt to Adjusted EBITDA (Quarterly) | not more than 1.50:1.00 | 0.83 |
Fixed Charge Coverage Ratio (Quarterly) | not less than 1.35:1.00 | 3.12 |
Loan-to-Value Ratio (Quarterly) | not more than 0.85 | 0.72 |
On May 1, 2020, the Company entered into a fourth amendment to the loan agreement extending the expiration date to May 1, 2023 and modifying the interest rate on amounts advanced to be equal to the WSJ prime rate plus a margin of 0.50%, with a 3.50% interest rate floor.
The Company was in compliance withfloor and will be secured by substantially all covenants in effect at March 31, 2020.of the Company's assets. There were no borrowings against this line of credit at March 31,June 30, 2020 andor December 31, 2019.
While we currently have no immediate plans to draw on this line of credit, the line of credit allows flexibility in funding our future operations subject to compliance with the covenants described above.
Commercial Term Notes
On May 30, 2019, the Company entered into an amendment to the loan agreement providing for a term note (the “Building Term Note”) in favor of Hancock Whitney Bank in the principal amount of $4.8 million. The proceeds of the Building Term Note were used to purchase a building to utilize as a new corporate headquarters for the Company. Beginning July 1, 2019, the Company makes monthly payments towards the outstanding balance. The Building Term Note matures on May 30, 2026 and is secured by substantially all of the assets of the borrower, including the real property acquired with the proceeds of the Building Term Note. The Building Term Note bears interest at a variable rate equal to the one month ICE LIBOR index plus a margin of 2.45% per annum. The Company is required to maintain a loan to value ratio of 85% with respect to the appraised value of the real property. In connection with the Building Term Note, the Company entered into an interest rate swap transaction (the "Interest Rate Swap Transaction") with Hancock Whitney Bank effectively fixing the interest rate for the Building Term Note at 4.68%.
On September 19, 2019, the Company entered into a third amendment to the loan agreement providing for a term note (the “Term Note") in favor of Hancock Whitney Bank in the principal amount of $5.0 million. The proceeds of the Term Note will be used for general corporate purposes. Beginning October 19, 2019, the Company makes monthly payments towards the outstanding balance. The Term Note matures on September 19, 2022 and is secured by substantially all of the assets of the borrower. The Term Note bears interest at the rate of 4.60% per annum.
Under the terms of the Commercial Business Loan Agreement, the Company is subject to the following financial covenants:
| | | | | | | | |
| Financial Covenant | Required Ratio | Ratio |
| Total Debt to Adjusted EBITDA (Quarterly) | not more than 1.50:1.00 | 0.45 |
| Fixed Charge Coverage Ratio (Quarterly) | not less than 1.35:1.00 | 17.12 |
| Loan-to-Value Ratio (Quarterly) | not more than 0.85 | 0.72 |
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
The Company was in compliance with all covenants in effect at June 30, 2020.
Sources of funds
Our cash provided by operating activities in the threesix months ended March 31,June 30, 2020 was $0.6$22.0 million compared to $0.7$6.0 million in the threesix months ended March 31,June 30, 2019.
HHS Provider Relief Funds
The Company received $3.5 million of Provider Relief Funds from the United States Department of Health and Human Services (“HHS”) provided to eligible healthcare providers out of the $100 billion Public Health and Social Services Emergency Fund provided for in the CARES Act. The funds are allocated to eligible healthcare providers for expenses and lost revenue attributable to the COVID-19 pandemic. The fund payments are grants, not loans, and HHS will not require repayment, but the funds must be used only for grant approved purposes.
As of March 31,June 30, 2020, we had cash and cash equivalents of $8.4$29.7 million.
Use of funds
Our principal uses of cash are funding our new rental assets and other capital purchases, operations, and other working capital requirements. Over the past two years, our revenue has increased significantly from year-to-year and, as a result, our cash provided by operating activities has increased over time and now is a significant source of capital to the business, which we expect to continue in the future.
We may need to raise additional funds to support our investing operations, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. We may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders.
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressed in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
Leases
Leases under which we assume substantially all the risks and rewards of ownership are classified as capital leases. Upon initial recognition, the leased asset is measured at an amount equal to the lesser of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to the asset. The associated lease liability is drawn down over the life of the lease by allocating a portion of each lease payment to the liability with the remainder being recognized as finance charges. Leases that do not transfer the risks and rewards of ownership to the Company are treated as operating leases and are expensed as incurred.
Retirement Plan
The Company maintains a 401(k) retirement plan for employees to which eligible employees can contribute a percentage of their pre-tax compensation. Matching employer contributions to the 401(k) plan totaled $179,000$223,000 and $168,000$166,000 for the three months ended March 31,June 30, 2020 and 2019, respectively, and $402,000 and $335,000 for the six months ended June 30, 2020 and 2019, respectively.
Off balance sheet arrangements
The Company has no material undisclosed off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its results of operations or financial condition.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
Accounting and Disclosure Matters
Segment Information
We have determined that we predominantly operate in a single operating segment, which is the sleep and respiratory disorders sector of the DME industry. While we do provide some services and products outside of this operating segment, these operations, both in terms of revenue and profit, are not material to our operations and therefore have not been separately reported as a segment.
Critical Accounting Principles and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those estimates related to allowance for doubtful accounts, inventory adjustments, impaired assets, income taxes, deferred tax valuation allowances and stock-based compensation costs.
We state these accounting policies in the notes to the consolidated financial statements and at relevant sections in the Management's Discussion and Analysis of Financial Condition and Results of Operations. The estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:
Revenue recognition
Revenue Accounting under Topic 842
We lease DME such as non-invasive and invasive ventilators, PAP machines, percussion vests, oxygen concentrator units and other small respiratory equipment to customers for a fixed monthly amount on a month-to-month basis. The customer generally has the right to cancel the lease at any time during the rental period. The Company considers these rentals to be operating leases.
Under FASB Accounting Standards Codification Topic 842, “Leases”, we recognize rental revenue on operating leases on a straight-line basis over the contractual lease term which varies based on the type of equipment rental. The lease term begins on the date products are delivered to patients, and revenues are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare, private commercial payors, and Medicaid. Certain customer co-payments are included in revenue when considered probable of payment, which is generally when paid.
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressed in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
Due to the nature of the industry and the reimbursement environment in which we operate, certain estimates are required to record net revenue and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial.
Revenue Accounting under Topic 606
We sell DME, replacement parts and supplies to customers and recognize revenue based on contractual payment rates as determined by the payors at the point in time when control of the good or service is transferred through delivery to the customer. The customer and, if applicable, the payors are generally charged at the time that the product is sold.
We also provide sleep study services to customers and recognize revenue when the results of the sleep study are complete as that is when the performance obligation is met. The transaction price on both equipment sales and sleep studies is the amount that we expect to receive in exchange for the goods and services provided. Due to the nature of the DME business, gross charges are retail charges and generally do not reflect what we are ultimately paid. As such, the transaction price is constrained for the difference between the gross charge and what is estimated to be collected from payors and from patients. The transaction price therefore is predominantly based on contractual payment rates as determined by the payors. We do not generally contract with uninsured customers. The payment terms and conditions of customer contracts vary by customer type and the products and services offered.
We determine our estimates of contractual allowances and discounts based upon contractual agreements, our policies and historical experience. While the rates are fixed for the product or service with the customer and the payors, such amounts typically include co-payments, co-insurance and deductibles, which vary in amounts, and are due from the patient. We include in the transaction price only the amount that we expect to be entitled, which is substantially all of the payor billings at contractual rates. The transaction price is initially constrained by the amount of customer co-payments, which are included in the transaction price when considered probable of payment and included in revenue if the product or service has already been provided to the customer.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
Due to the nature of the industry and the reimbursement environment in which we operate, certain estimates are required to record net revenue and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial.
Returns and refunds are not accepted on either equipment sales or sleep study services. We do not offer warranties to customers in excess of the manufacturer’s warranty. Any taxes due upon sale of the products or services are not recognized as revenue. We do not have any partially or unfilled performance obligations related to contracts with customers and as such, we have no contract liabilities as of March 31,June 30, 2020.
Allowance for doubtful accounts
We estimate that a certain portion of receivables from customers may not be collected and maintain an allowance for doubtful accounts. We evaluate the net realizable value of accounts receivable as of the date of consolidated balance sheets. Specifically, we consider historical realization data including current and historical cash collections, accounts receivable aging trends, other operating trends and relevant business conditions. Because of continuing changes in the health care industry and third-party reimbursement, it is possible that the estimates could change, which could have a material impact on the operations and cash flows. If circumstances related to certain customers change or actual results differ from expectations, our estimate of the recoverability of receivables could fluctuate from that provided for in our consolidated financial statements. A change in estimate could impact bad debt expense and accounts receivable. Our allowance for doubtful accounts was $10.2$9.3 million and $5.9$6.9 million as of March 31,June 30, 2020 and 2019, respectively, and based on our analysis, we believe the reserve is adequate for any exposure to credit losses.
Stock-based compensation
We account for our stock-based compensation in accordance with ASC 718—Compensation—Stock Compensation, which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. Stock–based compensation cost for stock options are determined at the grant date using the Black-Scholes option pricing model. Stock-based compensation cost for restricted stock units are determined at the grant date based on the closing stock price. The expense of such stock-based compensation awards is recognized using the graded vesting attribution method over the vesting period.
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VIEMED HEALTHCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
(Tabular amounts expressed in thousands of US Dollars, except per share amounts) |
March 31, 2020 and 2019 |
Interest rate swaps
We utilize an interest rate swap contract to reduce our exposure to fluctuations in variable interest rates for future interest payments on Term Note.
For determining the fair value of our interest rate swap contract, we use significant other observable market data or assumptions (Level 2 inputs) that we believe market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. Our fair value estimates reflect an income approach based on the terms of the interest rate swap contract and inputs corroborated by observable market data including interest rate curves. We include unrealized gains in Other Assets, as a component of Long-term Assets, and unrealized losses in Accrued Liabilities, as a component of Long-term Liabilities on the Condensed Consolidated Balance Sheets.
We recognize any differences between the variable interest rate payments and the fixed interest rate settlements from our swap counterparty as an adjustment to interest expense over the life of the swap. If determined to be effective cash flow hedges, we record the changes in the estimated fair value of the swaps to Accumulated other comprehensive income or loss on our Condensed Consolidated Balance Sheets. To the extent our interest rate swaps are determined to be ineffective, we recognize the changes in the estimated fair value of our swaps in Interest and other non-operating expenses, net on our Condensed Consolidated Statements of Income.
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VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS | | |
| (Tabular amounts expressed in thousands of US Dollars, except per share amounts) | | |
| June 30, 2020 and 2019 | | |
Income taxes
We are subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the provision for income taxes. Our income tax provisions reflect management’s interpretation of country and state tax laws. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business and may remain uncertain for several years after their occurrence. We recognize assets and liabilities for taxation when it is probable that we will receive refunds or pay taxes to the relevant tax authority. Where the final determination of tax assets and liabilities is different from the amounts that were initially recorded, such differences will impact the current and deferred income taxes provision in the period in which such a determination is made. Changes in tax law or changes in the way tax law is interpreted may also impact our effective tax rate as well as our business and operations.
Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to temporary differences between the financial statement carrying value of assets and liabilities and their respective income tax bases. Deferred income tax assets or liabilities are measured using enacted or substantively enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be settled. The calculation of current and deferred income taxes requires management to make estimates and assumptions and to exercise a certain amount of judgment concerning the carrying value of assets and liabilities. The current and deferred income tax assets and liabilities are also impacted by expectations about future operating results and the timing of reversal of temporary differences as well as possible audits of tax filings by regulatory agencies. Changes or differences in these estimates or assumptions may result in changes to the current and deferred tax assets and liabilities on the consolidated statements of financial position and a charge to or recovery of income tax expense.
Recently Issued Accounting Pronouncements
See Note 2 – Summary of significant account policies of the Notes to Condensed Consolidated Financial Statements for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial positions and cash flows.
Item 1. Legal Proceedings
From time to time, we may be subject to various ongoing or threatened legal actions and proceedings, including those that arise in the ordinary course of business, which may include employment matters and breach of contract disputes. Such matters are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. In the opinion of management, the outcome of such routine ongoing litigation is not expected to have a material adverse effect on our results of operations or financial condition.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 4, 2020, which could materially affect our business, financial condition or future results. Except as set forth below, there have been no material changes in our risk factors from those disclosed in that Annual Report.
On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. Various policies and initiatives have been implemented to reduce the transmission of COVID-19, including travel bans and restrictions, the postponement of non-essential medical surgeries, the limiting of access to medical facilities in certain areas, the promotion of social distancing and the adoption of remote working policies. Local, state and national governments continue to emphasize the importance of essential medical personnel and we remain open to meet the needs of our communities. Employee and patient safety is our first priority, and as a result, we put preparedness plans in place for our employees, especially our clinical personnel, and modified our clinical protocols to limit unnecessary patient encounters in order to ensure the safety of our employees as well as the safety of our patients. These measures do not appear to be negatively impacting our patient attrition rate at this time. In addition, our current ability to assess potential patients in hospitals varies by hospital and city, but overall our business of setting up new patients in the home is continuing. Ascontinuing although at lower levels than in recent periods. In late May and early June, many state governments began a result,phased reopening of their economies while adhering to new guidelines and enhanced safety measures, including social distancing and face mask protocols. However, certain states have paused or reversed plans to reopen their economies as new cases of COVID-19 have been on the rise in recent weeks.To date there has been minimal disruption to our normal operations, though it is possible that more significant disruptions could occur if the COVID-19 pandemic continues for a prolonged period of time.
The COVID-19 pandemic has resulted in a significant economic downturn in the United States and globally and has also led to significant disruptions and volatility in capital and financial markets. Broad economic factors resulting from the current COVID-19 pandemic, including high unemployment and underemployment levels and reduced consumer spending and confidence, could also affect our service mix, revenue mix, payor mix and patient base, as well as our ability to collect outstanding receivables. Business closures and layoffs in the geographic areas in which we operate may lead to increases in the uninsured and underinsuredunder insured populations and adversely affect demand for our services, as well as the ability of patients and other payors to pay for services rendered. Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect our financial results and require an increased level of working capital. In addition, we may experience supply chain disruptions, including delays and price increases in equipment and supplies. Staffing, equipment and supplies shortages may also impact our ability to assess potential patients in hospitals and set up and treat patients in the home.
We believe we presently have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times, such as limiting discretionary spending across the organization. In addition, we have received, and may continue to receive, payments, grants or other relief under the CARES Act and other stimulus efforts. While the overall impact of COVID-19 on our consolidated results of operations for the three and six months ended March 31,June 30, 2020 has resulted in an overall increase in revenues related to additional product sales during the period,periods, the overall impact that COVID-19 will have on our consolidated results of operations throughout 2020 remains uncertain, and difficult to predict and will depend on, among other factors, the duration and severity of the pandemic, as well as any negative economic conditions arising from the pandemic, our ability to assess potential patients in hospitals and set up and treat patients in the home and the impacts of government actions and administrative regulations on the healthcare industry and broader economy, including through existing and any future stimulus efforts. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, liquidity and capital resources. If COVID-19 continues to spread or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations.